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3 Small-Cap Biotech Stocks You Can Buy Right Now

Keith Speights, The Motley Fool

Few stocks have the potential to generate explosive returns like small-cap biotech stocks. Week in and week out, small-cap biotechs report pipeline updates that often send their shares into orbit.

There are too many small-cap biotech stocks to easily keep track of, though. And not all of them have a good shot at success.

Three that I think do have great prospects are Cara Therapeutics (NASDAQ: CARA), Editas Medicine (NASDAQ: EDIT), and Viking Therapeutics (NASDAQ: VKTX). Here's why these are small-cap biotech stocks that you can buy right now.

Scientist holding a test tube with healthcare-related icons displayed in the foreground

Image source: Getty Images.

1. Cara Therapeutics

Cara Therapeutics expects to announce results in the second quarter from a phase 3 clinical study evaluating its lead candidate, Korsuva injection, in treating chronic kidney disease-associated pruritus (CKD-aP) in hemodialysis patients. The biotech also has other late-stage studies underway to assess the efficacy and safety of Korsuva. If those results are positive, Cara could have a big winner on its hands.

The company inked a deal with a big partner last year to market Korsuva as a treatment for CKD-aP in countries other than the U.S., Japan, and South Korea. Dialysis services giant Fresenius Medical Care plans to promote the drug in its U.S. dialysis centers. At its peak, Korsuva could generate up to $500 million in sales in the U.S. alone for the CKD-aP indication.

Cara also has other growth opportunities. The company expects to report preliminary results in the second half of 2019 from a phase 2 study of an oral version of Korsuva in treating CKD-aP patients who aren't on dialysis. It will soon start a couple of other phase 2 studies of oral Korsuva in treating chronic liver disease-associated pruritis (CLD-aP) and in treating patients with atopic dermatitis and pruritis. 

Although Cara's share price has soared close to 50% so far this year, the biotech's market cap is still only around $750 million. With the significant potential opportunities for Korsuva, I think the stock has a lot of room to run if all goes well in clinical studies.

2. Editas Medicine

Editas Medicine isn't as far along as Cara is. But the company's CRISPR gene-editing platform could be game changers for several diseases. Optimism for this platform is why Editas sports a market cap of over $1 billion despite having only one early-stage drug in development.

The lead pipeline candidate for Editas is EDIT-101, which targets the treatment of genetic eye disease Leber congenital amaurosis type 10 (LCA10). Editas and its partner, Allergan, expect to begin patient dosing in a phase 1 clinical study in the second half of 2019. This will be the first in vivo (in the body) clinical trial of a CRISPR gene-editing therapy in humans.

Editas thinks that the expertise gained with EDIT-101 will enable it to rapidly move into other genetic eye diseases. Usher syndrome type 2A (USH2A) is the next target. The biotech anticipates having a candidate ready by the end of the year for testing that could lead to advancing to an initial clinical trial in humans.

Interim CEO Cindy Collins said in Editas' Q1 conference call in May that the biotech is also "advancing best-in-class medicines that may revolutionize the treatment of cancers, sickle cell disease, and other serious intractable diseases." Editas is working with Celgene on developing chimeric antigen receptor T cell (CAR-T) therapies to fight cancer and is especially enthusiastic about its approach to treating sickle cell disease and beta thalassemia, both of which are rare genetic blood disorders.

3. Viking Therapeutics

Viking Therapeutics captured the attention of many investors last year after it reported great results from a phase 2 study of VK-2809 in treating patients with non-alcoholic fatty liver disease (NAFLD) and elevated low-density lipoprotein cholesterol (LDL-C). But it's another phase 2b study of the experimental drug that should really have investors eagerly waiting.

The biotech plans to start a phase 2b study of VK2809 in treating nonalcoholic steatohepatitis (NASH) in the second half of 2019. NASH is a very hot area right now, with several big and small drugmakers scrambling to develop an effective treatment for the liver disease.

VK-2809 looks especially promising in treating NASH because of its potential for reducing liver fats and providing cardiovascular benefits. The drug also appears to have a good safety profile. This could attract interest from big drugmakers that are looking to develop combination therapies for treating NASH.

Viking could soon have another drug in clinical testing. The biotech plans to file for approval in the second half of the year to begin a phase 1 clinical study evaluating VK0214 in treating genetic disease X-linked adrenoleukodystrophy (X-ALD).

Are these stocks good picks for you?

While I think the long-term prospects for Cara, Editas, and Viking look promising, these small-cap biotech stocks aren't great picks for all investors. Each of these biotechs faces significant risks that its pipeline candidates won't pan out. And because they're not profitable yet, the companies could have to raise cash in the future through issuing new shares. That causes dilution in the value of existing shares.

On the other hand, if you're an aggressive investor willing to take on considerable risk, you should find a lot to like with these three biotech stocks. But you might have to wait a while for Cara, Editas, and Viking to see revenue pouring in. A long-term investing horizon is a must when buying these small-cap biotech stocks.

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Keith Speights owns shares of Celgene and Editas Medicine. The Motley Fool owns shares of and recommends Celgene and Editas Medicine. The Motley Fool has a disclosure policy.